The PPI of Property
David Lawrenson explains why, (as the new 2017 edition of his book shows), he is still not recommending his clients buy leasehold property (except maybe in Central London). And he highlights how the UK’s big house builders are now making even new build houses, (which would have been freehold in the old days), subject to leases with big and escalating ground rents. In this post, we look at the “PPI of the property world”.
The PPI of Property
The UK’s big quoted house builders know how to make cash don’t they? They are the best performing sector in the UK stock market, over the last ten years, they are great at turning land into big cash and they are also great at getting their way with whoever is in government. What a great PR machine they have!
As Mark Knopfler might have said, “Those guys ain’t dumb.”
Over the last few years they have a found a great new way to make even more cash, putting even houses on leaseholds – and with rapidly escalating ground rents too.
Back in the old days, if you bought a house, (as opposed to a flat), you’d expect to buy it as a freehold. Freehold is so much better than leasehold as it puts you in control, not someone else! Compare this to leasehold, where you are like some kind of a glorified tenant, having to pay service charges and ground rents and being forced to cede so much control to someone else. (Leasehold is arguably a legacy of medieval times and it is usually something that I try to persuade people I advise to steer clear of, unless they are buying a flat in a very upmarket area in central London).
But most of the big house builders have recently switched onto leasehold houses as a great new way of making money. They have been busy selling an increasing number of new build houses as leaseholds with fast escalating ground rents. We have seen some examples where the ground rent starts at £250 a year and then doubles every decade for 50 years, which, if inflation stays low, will start to look pretty expensive before too long.
PPI and Property
Only now is there an outcry about the unfairness of this with some commentators calling it, “the PPI of the property business”.
The trend has certainly caught on fast. Sales of leasehold houses have almost doubled since 2010 to around 9,000 units by 2015. (Source: The Land Registry).
But as the press have cottoned onto this, it has now become an emerging political issue. One of the big builders, Taylor Wimpey, has said it reviewing those leases it has already sold with such offending escalating ground rent clauses attached. It will be interesting to see if their “review” will actually stop them doing it!
Of course, the developers get a great cash flow (nice!) and at any point they can also sell the freehold, if that suits them better. Just having the guaranteed ground rent cash flow coming in improves their rating in the City and their ability to raise equity and other finance. According to charity, Leasehold Knowledge Partnership, the sector earns from £300m to £500m a year, just from selling the leases onto another party, also nice!
Of course, this latest scandal of sticking unnecessary leaseholds onto freeholds is just one of the many ways that leaseholders get a bad deal. There are many others.
IN 2012, “Which?” published a report which said that £700m was overpaid in service charges each year.
Pension Funds, PPI and Leasehold
Leasehold tenures were set up on 44% of all new homes sold last year.
And many are controlled by the pension funds, who, as we have pointed out before, also have a mean PR machine. (We have shown this to be the case in the way they have persuaded the government that buy to let landlords provide a lousy product and that the future is big scale build to let controlled by institutional investors like themselves).
If you are unlucky, your freehold will be owned by some hidden trust registered in the Turks and Caicos Islands or some other “tax efficient” locale. Other leaseholders just have an incompetent freehold manager running them.
You can be ripped off royally all down the line – from the cost of them writing you a letter, to them arranging the insurance and pocketing a big commission…. and more, much more!
Fight your freeholder and you may still be saddled with legal costs, even if you win. In 2013, one pensioner faced a bill of £76,000 in legal and court costs despite winning a dispute over a £9,000 service charge.
I have just two leasehold places. Both work well for different reasons. One of them has an excellent management company running things but, even here, every few years, the freeholder tries to sting me for £500 or so, for “giving me permission to let out my flat”, even though the lease says they cannot do this. Each year I tell him, in the politest way, to “GFH”. (No translation required!)
New Edition of “Successful Property Letting – How to Make Money in Buy to Let”
In the brand new, 2017 edition, of my book, “Successful Property Letting” which is now available to order, (see links below), I have expanded the section on leasehold. And I show how you can find the sort of leasehold property which can work well. The new edition is available to order now.
Great work is being done in fighting the corner for leaseholders and Resident Management Companies by the likes of News on The Block and the Federation of Private Resident Associations (FPRA). Also, LEASE, which is supported by the government, is very good for free advice too.
But the freeholders include some very powerful landowners, like the Cadogan Estate in London, who have very powerful connections. And so, despite the promise to reform leasehold contained in the recent Housing white paper, don’t expect much to happen. In housing, much power will still be in the hands of the very “privileged few” whatever Teresa May promises.
Indeed, only in 2016, the Wellcome Trust and Sloane Stanley Estates, who “invest in freeholds”, won a court ruling for a new freeholder friendly pricing model that will give them and other freeholders the right to get even more cash for selling freeholds or extending leases.
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We advise a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors and insurers. We help them develop and improve their services and products for private landlords. David Lawrenson, founder of LettingFocus, also writes for property portals, speaks at property events and is regularly quoted by the media.
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